The current market environment is plagued by global macro and geopolitical tail risks, which has driven elevated volatility and uncertainty in the outlook for both global and Australian equities.

The domestic economy, and indeed the ASX, is relatively well placed in this context, due to a limited US tariff impost on Australia, an improving earnings trajectory, stimulatory pre-election spending promises from both major parties, and the prospect of numerous RBA rate cuts this year. However, the ASX is nevertheless likely to be driven in part by the ebbs and flows of global macro factors (particularly US-China trade talks), given their broad influence on risk sentiment. 

With uncertainty still elevated and the near-term direction of the market unpredictable, the key question we have been hearing is ‘how should investors be acting in this environment?’

Should investors buy defensives to provide downside protection against further macro/market deterioration in the near-term? Or alternatively, should investors be looking through the immediate uncertainties to take advantage of recent market weakness by acquiring shares in high-quality businesses at ‘discount’ prices relative to their long-term fundamental value? 

For investors looking to deploy capital into the ASX at this juncture, we believe the best strategy is to employ a ‘barbell’ approach by adding to a mix of defensives and higher-beta growth businesses that have sold-off materially amidst the market dislocation. While the Focus Portfolio has a quality/growth bias, it is well diversified across sectors and styles (i.e. defensives/cyclicals, growth/value, resources/industrials), which we believe positions it well for the uncertain market outlook. 

In this report, we provide an update on the Focus Portfolio’s positioning, while also exploring which high-beta growth companies and defensives offer attractive long-term value at current levels. The focus of this report is on the industrials (ex-mining and resources) part of the market, following last week’s update on the resources sector. 

Figure 5 displays a list of ASX 300 industrials companies that have underperformed since the market’s peak and now offer attractive long-term value in our view, notwithstanding near-term uncertainties. None of the companies in figure 5 have a significant direct US tariff impost. 

We have grouped the table into two key categories:

1. De-rated Growth - companies whose valuations have de-rated materially without any meaningful expected deterioration in their near/medium-term earnings outlook.
2. Discounted ‘Cyclicals’ - companies that may face some cyclical earnings headwinds from a weaker US macro/market outlook, but whose earnings outlook remains structurally attractive over the medium/long-term.

Within this screen, our three preferred large cap exposures/ Focus Portfolio holdings at this juncture include WiseTech, Xero, and Goodman Group. Each of these businesses have robust balance sheets, while their attractive long-term structural growth outlooks remain largely unchanged despite a more challenging operating environment.

We define defensives as businesses with acyclical or non-discretionary demand profiles that are relatively agnostic to the macro environment. Defensives typically benefit from attractive industry structures and pricing power, and have equity market betas that are lower than one. This category includes consumer staples, infrastructure owners, telcos, insurance providers, and healthcare businesses.

In Figure 6 we have conducted a screen of large/mid cap (ASX 100) defensives. We have screened the index for companies with historical betas that are ≤0.8x, while also applying a forward-looking qualitative overlay to take into account earnings quality and resilience (excluding more cyclical businesses from the list).

Our focus is on defensive growth 

A common pushback against investing in defensives is the (flawed) notion that they merely provide downside protection, but are unlikely to outperform over the long-term (or in a bull market). This is something we strongly disagree with, providing a selective approach is taken. 

Our approach to investing in defensives has an overarching focus on quality and growth, not merely earnings stability and protection against a weaker macro/market environment. 

This is a key reason the Focus Portfolio has zero exposure to lower-growth defensives like energy utilities, toll roads, pipelines and airports. 

Each of the Focus Portfolio’s defensive exposures have bottom-up levers that should underpin above-market earnings growth, which we expect to support outperformance over the medium-term irrespective of the market environment (see Figure 7 and 8).